How Much Do You Need For Retirement (Part 1)

From previous posts on “Needs and Wants” and “Inflation Rate”, you have got the idea and understand the condition of your actual needs. If you have not done it, do it now as these are important components to allow you to identify how much you need for retirement.

To make it simple, I am going to list out the process in step by step for easy reference. Elaboration will be inserted when necessary to provide clear understanding. If you have any doubt, do feel free to leave your comment and I will strive to clear your query.

Step 1: To calculate years to retirement (hereinafter called A)

To complete this step, you have to define your targeted retirement age and subtract it from your current age. Some of you might target to retire at the age of 55 while others might opt for early retirement. You might insert any age you want to see the required amount for retirement. Of course, logically, the shorter the years to retirement, the more the retirement fund is required.

Step 2: To get your current annual income after tax (hereinafter called B)

Use only the actual monthly salary or income after tax and, if any, SOCSO only times 12. Do not consider bonus in simply because your bonus might vary from year to year. In addition, the process needs your estimated increment, if any. Therefore, it should be calculated based on your basic only.

Step 3: To get your current annual expenses (hereinafter called C)

You should have the figure now if you have done all the activities highlighted in my post of “Needs and Wants”. If you do not have one, do it now before going further.

Step 4: To get your personal inflation rate (hereinafter called D)

You should have the figure now if you have done all the activities highlighted in my post of “Inflation Rate”. If you do not have one, do it now before going further.

Step 5: To get estimated rate of return at retirement (hereinafter called E)

This is a tricky part. How should you get the rate of return? You may refer back to my previous post on “Investment: Rate of Return” to get some ideas. I have also included a comment about the details on how to calculate rate of return on irregular investment. Should you need further clarification, do let a comment to me.

Step 6: To get future value of annual expenses at retirement age (hereinafter called F)

Follow this formula: C * ( 1 + D ) ^ A

Step 7: To calculate capital required to generate income to cover annual expenses (hereinafter called G)

Follow this formula: F / E

Now, you should have the image on how much do you need at retirement. The figure shown in Step 7 has not considered the impact of EPF contribution, if any. The actual requirement shall be after deduction of your EPF’s future value and I will discuss it in more detail in Part 2.